Harvard Report Shows Remodeling Decline, Reasons for Optimism

Kermit Baker, director of the Remodeling Futures program at the Joint Center for Housing Studies of Harvard University, talks about some of the findings of the report.

The Joint Center for Housing Studies of Harvard University releases its biennial report on the state of the remodeling industry today. 

The report confirms what most of us already know: The remodeling industry fell fast and hard in 2008 after years of explosive growth. Still, there are reasons to be optimistic that we'll see long-term growth in the market.

(The full report is available on the Joint Center's Web site, but here are some of the highlights.)

On the positive side, spending on remodeling reached $327 billion in 2007, capping off a decade of incredible growth from $161 billion in 1997. From 2003 to 2007 alone, spending increased by 43 percent. 

Unfortunately, Harvard tags 2007 as the high water mark of remodeling activity and estimates spending on improvements has dropped 16 percent since then. Spending is likely to continue to drop for the near future because of declining sales of existing homes and dropping home prices. Existing home sales are still the biggest predictor of remodeling activity and with dropping sales comes less remodeling. Recent homebuyers spend 23 percent more on improvements than other homeowners. Homeowners are also less likely to invest in something that is losing value.

The long-term outlook for remodeling is a lot better, though. Harvard cites three reasons for us to be optimistic: immigration, aging rental stock and increasing consumer interest in green remodeling.

• Immigration - Foreign-born homeowners are very active in the improvement market and now make up more than 10 percent of improvement spending. They also tend to be younger and are just entering their prime remodeling years. Their spending is also growing at a faster clip than their domestic-born counterparts.
• Rental stock - During the boom in home buying, many rental owners didn't invest in their units. With rising demand for rentals, many units will need to be upgraded. Until the 1990s, spending on rental and owner-occupied housing moved at roughly the same pace. From 1990 to 2007, though, spending on rental housing dropped 40 percent in inflation-adjusted dollars while spending on owner-occupied homes increased by 30 percent.
• Green - Green remodeling, especially in the area of energy efficiency, is increasingly attractive to homeowners. The aging housing stock provides a great opportunity to reduce energy use and lower utility bills.

Beside those three factors, there's also the simple fact that over the next decade the nation's housing stock will have to support another 14 to 15 million households.

When the market will recover will vary greatly depending on the health of local markets. In those areas that had the biggest bubbles in home prices (like California and Florida), recovery will take longer as rising foreclosures and dropping prices make remodeling an unattractive proposition. However, those areas like Texas and much of the Midwest should see earlier recoveries because those markets didn't experience the same level of price run-ups as the former boom markets.

Listen to Jonathan Sweet's exclusive interview with Kermit Baker.

You can read more coverage of the report in the March issue of Professional Remodeler or here at ProRemodeler.com.

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